Tag: money

As described in our review of Silver Spoon Kids, the following are the individual “Money Narratives” for the Wolf and I, as well as our thoughts on a new “Money Narrative” for our own immediate family. The book recommends constructing these stories based upon reflections from asking the following types of questions:

What is your earliest money memory (ie, the first important purchase you made)?

What did you learn from your father/mother about money?

What are some of your family stories about money (ie, the time grandpa was really cheap, or your aunt made a ridiculous purchase)?

What kind of financial education did you receive growing up?

What were the big emotional issues around money in your family?

The Lion’s Money Narrative

Looking back on my childhood, I find myself puzzled by my family’s simultaneous desires to acquire money and wealth while desiring that it not change them in any meaningful way. What good is striving after money if you’ll live your life essentially the same way with it as you would without it (maybe plus a bigger, nicer house, a fancier car and a more comfortable vacation experience)? We didn’t spend a lot of time openly talking about money in our family, and when others noticed our wealth, it was an uncomfortable and sore subject. I remember being bullied for being “rich” in grade school which confused me at the time because I wore the same clothes and ate the same lunch and rode the same kinds of bikes that other kids at school did. And it hurt because I didn’t think it was true (we never used that word to describe ourselves inside the family) and I didn’t think I had any control over it– why persecute me for something my parents did?

It’s all the more confusing to think of where those kids came up with it. They must have heard it from their parents. And their parents must’ve interacted with my parents and somehow, despite my parents trying not to let their success change them noticeably, it did. When I shared the fact that I was being bullied, I remember being told, “We’re not rich, we’re just well off. And it’s none of their business.” Not very helpful advice for a young child dealing with these social issues! I learned a few things from that experience: that money could be dangerous even if you weren’t “rich”, and that even if I or my family were “rich”, I didn’t deserve it and was a worse person for having it. As an adult, that lesson has lingered and I’ve struggled at times with a sense of being happy with what I have, whether that’s been a lot or a little or something in between!

A positive aspect of wealth that I learned from observing my parents is that it can be used to help others. We’ve helped out friends and family members when they’ve found themselves in a tight place. And while we’ve enjoyed many nice vacations, a good fraction of those included friends or relatives joining us at family expense. It has informed my own sense as an adult that if I have the capability to provide for others with less in some situation, I can do that without either party making “a thing” of it and instead just focusing on the opportunity for mutual enjoyment.

Sadly, I did not get much financial instruction growing up. I observed my parents being budget-conscious and balancing a checkbook back when that was something you had to do (they still do this although I’ve encouraged them to set up an electronic account management system many times) as well as reviewing utility and credit card bills to ensure there were no erroneous charges. But aside from having my own bank account to collect gift monies and being encouraged to operate lemonade-and-cookie stands or hold summer jobs as a youngster, I wasn’t taught much about how to make money or how to manage investments. Looking back on it, I don’t think my parents had anything to teach. My dad got swept up in the excitement of the Tech Boom in the late 90’s and I remember him coming home one day crowing about the wild price action in his AOL stock, and then coming home dejected the following week when it had just as unexpectedly crashed. I would watch Wall Street Week with Louis Rukeyser on PBS on Friday nights with my dad, but we never talked about it and I didn’t fully understand what they were discussing on the show or what the stock market was. I didn’t realize I could invest in stocks on my own until well into college when I discovered the works of Benjamin Graham, somehow without ever hearing about Warren Buffett! Certainly no one ever sat me down and taught me the wonders of compound interest and the importance of getting an early start for a lifetime of successful investing.

And the greatest single source of wealth in our family, our privately owned business, was considered a taboo subject for dinner table discussion because my mom didn’t want her children to feel pressured to be a part of it. Conflicted is definitely a polite way of putting our family’s relationship with money, although on the whole I seem to have picked up a few healthy attitudes and habits because I’m a big saver, abhor the use of debt and credit and have no misgivings about money growing on trees or magically replenishing itself with use.

The Wolf’s Money Narrative (as transcribed by the Lion)

Part of my family’s culture involves exchanging red envelopes full of money on special holidays or in recognition of significant life events. My earliest memories of money are receiving lots and lots of these envelopes, so much so that they filled up an old Swiss milk chocolate candy jug I used to contain them and overflowed the brim! I didn’t understand why I was getting this money or what it was for but I wasn’t going to complain. I mostly just saved the money because I received so much more than I had wants or needs despite growing up humbly.

I learned from my mother that money is not for spending. You work really hard, you earn a lot of money, save it all, don’t spend it, don’t enjoy life. Money is hard to come by. I learned from my father you work really hard, you don’t earn a lot of money, you don’t spend it, and you don’t enjoy life. And that’s not what he told me, that’s what I gathered from observing him. And you let your wife or the smarter person of the couple manage it for you.

Everyone in my family worked really hard, but none of them made enough to feel satisfied. They never explained how much they’d have to make to feel satisfied. And they didn’t seem to have time to enjoy their money anyway because they were always working too hard trying to get more of it!

Money was not a numerical, quantitative thing, it was just some abstract concept.

I spent all of my red envelope money on totally inconsequential things once I realized I had the ability to spend money as a teenager. I didn’t think about what I needed, I just thought “I have money, I guess I’ll spend it”. I wasn’t a conscious spender. My parents never taught me anything, so I just followed my impulses. I didn’t know what we were hoarding money for so I figured I’d just spend it. I wish someone had told me what money could be used for so I could’ve been more thoughtful about the way I decided to spend it back then!

Some things I admired about my family’s attitude toward money is that they saved it. It takes a lot of discipline to save money and not to take vacations or be tempted by material things. The only unethical thing about money I remember is that my uncle gambled a lot of money and this was embarrassing for the family. It was considered wasteful. It was taking risks but not on a sure thing. Tempting fate. Casinos are not seen as having honor and integrity, so it’s frowned upon to be seen there.

I had an accounting class in middle school, but I didn’t learn budgeting until I got married and the Lion taught me. He was also the one who taught me about retirement savings, IRAs and investing.

One big emotional issue about money growing up was that I learned my extended family helped pay for my college education so I wouldn’t have debt. It was very touching and as a result I feel obligated to return the favor by treating elder family members to meals and travel.

When I think about my own affluence, I think “What affluence?” It’s hard to view our position as actually mine, that it doesn’t really belong to me because my husband is the breadwinner and I am the homemaker. That being said, I feel good about it, I feel lucky. I feel like I’ve come a long way. It’s a privilege to not have to worry about money and feel taken care of. That is not the way I remember growing up in terms of money.

Our New Money Narrative

We want to demystify money in our family and treat it with transparency. We also don’t want to fool ourselves or others about what money means to us, how we acquire it, how much we have and what we plan to do with it. Our plan is to talk about money early and often with our children and as much as possible find age appropriate ways to include them in family money management.

Just as we find activities for our Little Lion to contribute to the household well being, often tasks he himself comes up with after observing us, such as sorting laundry piles, sweeping the floors, assisting with meal prep and clean up, etc., we will look for ways he can be part of our money economy in the family.

At the present stage, when we buy something we let him hand over the means of payment and sign any receipts as necessary, so he understands that to get goods and services from others we have to pay for them. As our children grow, we will include them in dinner conversations about how work is going and where we stand on our budgeting. When it’s appropriate to provide them with an allowance, we’ll introduce them to the concept of budgeting and help them to develop ideas about how they can generate their own income beyond their allowance. We’ll also talk about savings and delayed gratification and the power of compound interest over time to help them conceptualize the tradeoff between some now or more later.

As a family that plans to homeschool, we’re particularly interested in the ways we can integrate math and financial literacy into real life activities. Grandma Wolf has a seasonal baked good distribution business and we look forward to sending the Little Lion to be a (paid) apprentice on her route from time-to-time, learning about marketing and customer service, costing and profit calculation and the value of a hard day’s work. We’ve also thought ahead about stock investing and portfolio management for an enterprising youngster with savings. We see no reason why our children can’t learn about investment selection and management in their adolescence and be in a position by their teenage years to fully research and manage their own portfolio of business interests. This is also appealing because it’s a way for our children to “follow their parents” into an activity and one where we can model the behaviors because we’re doing them ourselves.

We don’t want to give our children the impression there is anything shameful about having money, getting money or talking about money (or even wanting it!) We also don’t want to give our children the impression that simply having money or being able to get it makes a person valuable by itself. Life is complex and money is just one means and one end to be sought in a productive, interdependent life. That being said, we intend to have honest and frank discussions with our children about why some people have a lot more than others and why some people have a lot less– and the answer is not just “luck.” This may seem controversial or a way to invite social problems with children struggling to understand the nuances of life, but we see no way around acknowledging these fundamental realities. Some people are poor for a reason and some people are massively wealthy for a reason.

We are also giving great consideration to the concept of “philanthropy” versus “charity” in our family values surrounding money and wealth. We’re skeptics of “charity” generally and our children will not see us shipping checks to everyone who comes begging or has an emotional story to tell while we pat ourselves on the backs and feel good regardless of impact and outcomes. They also won’t get the impression that we feel guilty or a need to “give back”, or that giving away or gifting money is the only way to make contributions to their community or humanity. If “philanthropy” really does entail any act or service that makes the world a better place to live for everyone, then we will help our children to understand that being the best people they can be, putting their talents to their best use and living lives of principled striving for their conception of the good are all philanthropic endeavors that make the world better off, as also are donating to public and private causes they feel passionate about, serving in leadership roles in public and private life, giving their time and physical presence to various organizations and efforts and so on.

In summary, we want to raise our children with an awareness of money and wealth, a desire to make their own contribution to the family’s stores of value in their various forms, and with confidence that they can make their own contribution through their thinking and efforts. And with this stable foundation and sense of themselves, we want to see them go out boldly into the world around them, wherever that might be, and help others to build wealth and security of their own.

A fellow investor friend of mine sent me an e-mail and suggested I read “What’s the point?” by UK fund manager Terry Smith. We were originally talking about Michael Burry’s commencement speech at UCLA [PDF] and the idea that one of the things that was so extraordinary about it is the way he unmasked the villains and the corruption and spoke the truth unapologetically in such a public forum. I had also, in an earlier e-mail, complained about my lack of interest in blogging, feeling frustrated lately at the nearly overwhelming volume of fallacious bullshit floating around the net that seems to deserve a response yet leaves me tired and bored out of my mind every time I attempt another mud wrestling fiasco.

I don’t know if my frustration inspired the link to Terry Smith or if it was simply the next step in the theme of telling it like it is or what, but that blog post got me thinking. I’ve long thought about giving it one last hurrah and then hanging up my hat. Because, seriously, what is the point? You can tell the truth a million times but if your opponent is bent on lies and deceit, nothing can be done. (Of course, Mises adopted the slogan, from Virgil, of “Tu ne cede malis”, but he’s a smarter man than I, with more energy, apparently.)

In light of this, I wanted to share three critical experiences I had in college during my sophomore, junior and senior years, respectively, which have stuck with me to this day and serve, subtlety and fundamentally, to color my view of the intellectual Opposition. I believe my experiences are not unique, although few people besides me may have had the required awareness to realize it, and as such where I went to school back then is not important to the story. This is not about an institution but rather the institution of the American academic system and its culture as it exists today, and likely has existed for awhile before now and probably longer still in the future.

I want to give some insight into why I find it hard not to be dismissive of many people who claim to think differently than me on various philosophical subjects.

I first became suspicious of my academic curriculum when I learned that microeconomics was not a prerequisite for macroeconomics. Rather than being treated as fundamental knowledge built upon and reexamined from a more global standpoint in macroeconomics, microeconomics was treated as a separate discipline entirely, which could be studied before, during, or after macroeconomics or even not at all (at least, if you weren’t concerned about getting an economics degree). Of course, numerous macroeconomic theories contradicted accepted wisdom taught in the microeconomics course, but no explanation was given as to the nature and source of these apparent contradictions, nor where it was in the economic causal chain that things stopped making micro-sense and started making macro-sense. There was simply a dichotomy in place and you were expected to accept it and move on.

In my second year I was excited to take a class with a professor teaching “international trade” (you know, the separate set of economic principles and rules that apply when two people exchange goods across imaginary political boundaries). Everyone I knew who had taken the class spoke highly of this professor as a competent and entertaining lecturer and said the material itself was quite fun. We spent a lot of time in that class studying the roles of quotas, tariffs and other government interference in the economy. It was really about political economy, not economics, because economics doesn’t change when you move stuff over imaginary lines.

But what rubbed me kind of raw in the class was when this beloved professor spoke quite approvingly of the idea, built into his theoretical examples in class, of providing “transfer payments” (read: violent redistributive extortion for special interest groups carried out by the government) to currently privileged groups who would be “hurt” by “free trade”. This professor advocated that paying these highwaymen off and reaping the benefits of freer trade was a good idea in the long run.

“Uh, question, professor– wouldn’t it be best to just have free trade, without a complicated system of quotas, tariffs and transfer payments to interest groups? Isn’t that most economically efficient? Why don’t we learn about that?” This question got a knowing smirk and a request to meet the good professor privately during office hours to discuss, as there simply wasn’t enough time in lecture to discuss such twaddle.

Dutifully, I scheduled some office hours time to meet with the beloved professor and discuss. Again, I posed the question to him, why are we paying these people off? Isn’t it better to let them figure out their own way to survive a competitive market place without getting welfare from everyone else? After all, they have no right to a certain income or position within the market place. Again, a knowing smirk as the professor launched into a short anecdote about how he once was full of piss and vinegar like I about these subjects. But the truth of the matter, he told me, was more complicated.

And then he, in so many words, spilled the beans– if “we” don’t bribe these special interest groups with redistributive social justice, they’ll get their pitchforks and their torches and elect another Hitler. That was it. That was why he doesn’t teach actual free trade economics in his course. That’s why he thinks transfer payments are good. That’s why he was for FDR’s New Deal and the Social Security scam. He saw it as the only thing standing between us, and Hitler.

I tried to make the point that if you fear totalitarianism, transfer payments are actually a step toward totalitarianism, not a step away. He responded by suggesting that granting these dictator-electors-in-the-wings a little welfare would create some kind of social anchor where we’d go no further toward socialism past that point, having bought the evildoers off. Never mind people tried to buy Hitler off and he just asked for more until he went to war. And never mind that the US government has had to move far, far beyond the New Deal since then to keep neo-Hitler at bay, according to his logic.

At this point, having no response to my observation of yet another contradiction, I was informed that office hours had suddenly come to an end (I’d only been there for thirty minutes and had scheduled an hour and I didn’t see anyone waiting in the hall for an audience) and that although he really enjoyed our conversation, he was going to have to ask me to come visit with him during the summer to continue the conversation. Of course he knew I was an out of state student who would be returning home during the summer so he was actually dodging his responsibility to make sense of his intellectual positions.

I left his office reeling in confusion and frustration. Here is a guy that my peers think is one of the best instructors the university has to offer, he is considered to be a thoughtful and intellectual person, etc. Yet, I come to find out he is teaching disingenuously. He is guilty of the “smuggled premise”, that is, his economic values taught in his class have nothing to do with sound economic reasoning but rather a personal, political belief that is never named nor mentioned which is thereby “smuggled” into the lessons. Instead of being honest and telling his students “I am teaching you a bunch of stuff that doesn’t make economic sense, because I think it makes political sense”, he carries out his pedagogical mission in such a way that he exploits his students ignorance and credulity.

Why can’t this professor just tell everyone what he really believes? Are we not old enough for the truth? Did we not pay for the truth? Do we not expect the truth?

To say I was disappointed by this experience would be an understatement. But I tried to put it behind me as I continued my economic studies.

During my third year, I had another run in with an economics professor, this time one teaching a “money and banking” course who had done some consulting for the Fed and who used as a textbook in his class the work of the notorious intellectual bungler, Frederic Mishkin. I raised a lot of challenges to the material which were poorly handled by the professor, but there is one in particular that will always stand out to me because of its zaniness. We were discussing the “money multiplier” of fractional reserve banking and how with a tiny base of reserves banks could pyramid large amounts of credit on top and lever up their balance sheets. I raised my hand and asked, “Doesn’t levering the balance sheet increase the risk of crisis for the bank and for the banking system?”

The professor acknowledged that, well, yes, it does, but it’s all done within the proscription of the FDIC guaranteeing everyone’s deposits and the Fed serving as lender of last resort to prevent a total collapse. Then I asked, “Well isn’t that crisis kind of inevitable when you create duration mismatch between funds that are borrowed short and lent long like this?” And the professor acknowledged, well, yes, it does, but again it’s all done under the keen watch of the overseer regulatory bodies, this time a little bit more apprehensive. And then I went for the F-word. I raised my hand, “But professor, isn’t it fraud to lend out people’s money that they think is being held for safe-keeping at the bank? Why not have the bank separate the two activities, safe-keeping and loan-brokering?”

There was a pause and he looked kind of startled. His skin color rose and his face contorted into a mixture of anger and glee, because now he had “figured me out” and knew my true motive. He exploded: “So I guess if it were up to you the banks wouldn’t make any money, huh?!”

A little shocked at his outburst, I stammered, “Well, no, of course not, I don’t really see what their profitability has to do with my question…” but he cut me off. “Yeah, I see what you’re trying to do. You don’t want the banks to make any money, do ya?! Well, it’s a nice ideal but it doesn’t work in the real world and if banks didn’t make any money, we wouldn’t have any banks and you wouldn’t want to live in a world without banks!” he growled, signalling that question time was over and it was time to get back to his brilliant lecture on fraud-based banking economics.

The episode was so instructive for me. So THAT’S what he’s about– shilling for fraudulent reserve banking, not trying to explore the truth of the matter. He neatly dodged my very simple, very honest inquiry of how we might live in a world without systemic banking risk, a world which would still allow profit opportunities for banking operations. Instead, he constructed a false dichotomy — systemic risk due to fraud, and profit; or no profit and no banks — and then browbeat me and anyone else in the class who was listening to avoid serious discussion of the principle. It suddenly put things into perspective for me. He wasn’t there to impart any real knowledge about the economy to me, he was there to be a hatchet man and paid minion for the banking establishment as it stands today. Wouldn’t want any bright-eyed college kids getting uppity and questioning the scam now, would we?

I really thought that would be the tops. But then I got to my Labor Economics class in my fourth year.

You might be wondering at this point, “Labor economics? Are you mad? Why did you take that course as an elective?” It would be a reasonable question, but the truth is that it was the least horrible option amongst what I had to choose from at the time. To say I went into it with low expectations is an understatement.

Those low expectations were met admirably on two separate occasions, which were not the only examples to choose from but simply the most illustrative.

My professorista had spent her entire life after high school in academia and government bureaucracies like the Bureau of Labor Statistics. I would be surprised if she ever held a part time job as a youngster in the private sector. She demonstrated zero familiarity with the reality of markets. One day she provided the class her argument for government intervention in the economy, which was based on the “paradox of capitalism”, this being that capitalism is SO efficient and SO productive, that it drives things down to the cost of “near 0” (not actually zero, because that’d obviously imply superabundance and the end of scarcity for that good or service) and therefore these things become “uneconomic” to produce and won’t be provided for under the profit system, which means if we want them government must provide them as a public good.

One example she gave of this was childcare services. Now, let’s ignore the “empirical” fact that there are numerous for-profit childcare services out there, right here and now, which would seem to undermine her argument completely. Let’s just think about this logically for a second.

So long as a given good does not have a cost of 0, it is not superabundant and it is an economizable resource. For example, air is not an economic good because it is superabundant. You can breathe as much air as you need and don’t have to think about what you’d give up to ensure your supply of air, it’s just there. It has a cost of 0. But if it has a cost above 0, it must be economized, something must be given up to get it. And if at a particular point in time firms are so numerous and efficient at supplying a good, such as childcare services, that they can’t make a profit, what will happen is that the least efficient firms of the bunch will consume their capital (by earning losses over and over again) and exit the marketplace. And when they do this, the level of profitability for remaining firms will rise because the lowered supply will result in the ability to charge higher prices.

And this dynamic will play out forever over the life of the industry so long as people value childcare services. There will be a constant competitive dynamic tending toward the “right” supply of childcare services because the least efficient providers will exit with losses. And this is “good” from the standpoint of anyone interested in participating in the economy because it means that those extraneous resources will flood into other, underserved industries where profitability is much higher, indicating a relatively more important use for the resources versus childcare. At no point will the market stop providing childcare services entirely, requiring a timely government intervention and provision of this service to correct a “market failure.”

Well, recognizing that as the hogwash it was, I raised my hand and began disputing the logic just as I did above. She was so dumbfounded that I had the temerity to question her transparently flawed reasoning that she began what could best be called “sputtering”, rolling her eyes and trying to form even one word in response as if she were having a seizure. Finally, she gave up and said, “Would anyone like to respond to that and explain why he is wrong?” About ten different hands shot up, eagerly, and she called on a young man who halfway turned around in his chair to straddle his view between me in the back and her approving glances in the front. He began, “Governments can and should correct market failures, which happen frequently. For example, while I was studying abroad in Ghana, the government provided public bus service to the village I was staying at because it wasn’t profitable for private businessmen…”

I stopped him right there and pointed out that the lack of profitability is part of the phenomenon I just described, and it suggests the wastefulness of bus service to a small African village. The class erupted with anger and indignation. This was so not politically correct to suggest some poor villagers in Africa didn’t merit a dedicated bus service just because it wasn’t profitable to provide it! This lecture hall had about one hundred students in it. Suddenly, they were a-chatter, half of them noisily discussing how outrageous my view was amongst themselves, the other half turned and shouting/arguing with me simultaneously while the young man with the bus service anecdote continued droning on. This went on for several minutes before the professorista tried to get control back over the class and insisted we finish up the lesson, but by then it was too late as class was over and everyone made for the exits.

It was at this point that as people filtered out a guy sitting a little in front and to the right of me turned around and said, “For what it’s worth, I agree with you,” and then grabbed his bag and walked out. I guess it was better than thinking the entire class was ready to lynch me, but he certainly didn’t feel the need to come to my rescue in the heat of the argument!

The other memorable moment from that class came right near the end of the semester. The Wall Street investment banks were beginning their meltdown and that particular morning Bear Stearns had failed, which was all over the news and which had greatly agitated the students as several had received offers of employment there at the conclusion of the semester which were now in jeopardy. The professorista sought to calm everyone’s nerves by saying that this was a limited event, contained to a specific firm with poor risk controls and the Fed and the regulatory agencies were all over it.

I raised my hand and pointed out that this was indicative of a systematic impending crisis, that the authorities were NOT in control as evidenced by the fact that it had happened, and that it would get a lot worse before it got any better. I suggested that this was the first of many failures to come.

“Would you like to bet on that?” she said, mischievously, expecting me to back down with the bravado.

“I already have!” I exclaimed, as I had taken a few minor positions in my brokerage account at the time (don’t worry, I didn’t make out like John Paulson).

“Well, we’ll see…” she said, trying to quiet me down.

Yes, we did, didn’t we? I never followed up with her to see what she thought of giving me a hard time about my prediction in class, or whether she was willing to confess she had had it all wrong, but I think it demonstrates again a clear blind spot in the mindset of mainstream academics who are responsible for instructing this country’s (and the world’s) future leaders and productive people about intellectual curiosity, academic honesty and the nature of reality.

How many parents are aware of this when they insist their children must go to college? How many have audited the value of their kid’s higher education and determined that the small fortune it takes to get them through a “better” private institution is worth it in the face of antics like what I’ve described above?

Guard they treasures from loss; always ensure first that you don’t lose what you have and that you can get your money back out of any investment you make

Make thy dwelling a profitable investment; own your own home

Insure a future income; your financial planning should take into consideration the fact that you will have decreased earnings power as you age, and that one day you may pass on and leave dependents behind who need financial sustenance

Increase thy ability to earn; cultivate your own powers, study and grow wiser, learn new skills and enhance your ability and number of ways you can earn income

Meet the Goddess of Good Luck

Men of action are favored by the goddess of good luck

The Five Laws of Gold

Gold comes easily to anyone who would put aside 10% of his earnings to provide for an estate for his future and his family

Gold will work for the wise person who finds safe investments in which it can multiply on its own

Gold clings to the owner who looks after its safety in his dealings

Gold slips away from those who invest it carelessly or in ways he is not familiar with

Gold flees the man who has unrealistic earnings expectations, listens to tricksters and schemers or who follows his passions and desires rather than consideration and experience

Government agents must obey the same laws and moral codes as private citizens

I think this is a pretty good list. It definitely could get a conversation going. However, I wonder about some of the items on this list being redundant. I think the list might be able to be further circumscribed. I also think that the list goes back and forth between prohibitions, and declarations of principles or conditions or reality (thankfully, it doesn’t contain any positive obligations!) While the list seems fairly complete, I wonder if it captures all essential issues of a free society.

I should’ve known better than to buy a book touting “the age of” something that came into existence only a few years ago and is currently playing out. Living history? Only if it leaves a meaningful legacy behind. But after reading this breathless book about bitcoins and blockchains, I have my doubts.

According to the authors, the primary usefulness of the blockchain, what makes it revolutionary, is that it will allow for low cost financial transactions. Not improved privacy, accuracy or honesty in exchanges. Not an end to the menace known as government. A few basis points in savings on transactions requiring a financial intermediary.

And even then, that is doubtful. The blockchain does nothing of and by itself. Despite being the heralded horseman of the middleman apocalypse, it requires a bunch of middleman applications and services (still being developed!!) to be practically useful to anyone, and of course no one is building and operating those mechanisms for free. Hello, economic scarcity, nice to see you again!

That’s kind of the theme of this entire, horrible book. “Wouldn’t it be so cool if…” and “Things are going to be totally different when…” but we’re not there yet, and we might never be.

This book was prematurely written, poorly researched (hyperventilated hype and name-dropping is not journalism, it’s puff piece paid marketing) and offers little to anyone seeking to understand how the blockchain operates in layman’s terms, nor does it put the extremely short lifespan of this technology into a meaningful chronological context so one can follow where it came from and where it might be going.

Challenging the global economic order? Considering the amount of fraud the community has already witnessed as disclosed in the book, it appears to be more part and parcel and less revolution in the streets.

The blockchain may offer some interesting applications in due time that don’t involve stupid self-owning companies pursuing their robotic amoral self-interest, but in the meantime I’m bearish to indifferent about it all and will continue to keep a bemused distance from the phenomenon, including schtick introductions like this work.

This has got to be the best interview on the subject of gold in general, the functioning of the gold market and the implications for investors that I’ve ever come across. Blumen not only covers these specific subjects related to gold, but also discusses the Chinese economy, the US economy and the state of monetary and fiscal affairs and even the attitudes of value investors, demonstrating thoughtful familiarity with all he touches. Blumen is well-versed in Austrian economic philosophy and applies this theory to the various practical considerations resulting in surprising new perspectives on common themes.

It’s a long interview and it will only fully reward those determined to dive all the way in. Here’s an excerpt:

There are two different kinds of commodities and we need to understand the price formation process differently for each one. The first one I’m going to call, a consumption commodity and the other type I’m going to call an asset.

A consumption commodity is something that in order to derive the economic value from it, it must be destroyed. This is a case not only for industrial commodities, but also for consumer products. Wheat and cattle, you eat; coal, you burn; and so on. Metals are not destroyed but they’re buried or chemically bonded with other elements making it more difficult to bring them back to the market. Once you turn copper into a pipe and you incorporate it hull of a ship, it’s very costly to bring it back to the market.

People produce these things in order to consume them. For consumption goods, stockpiles are not large. There are, I know, some stockpiles copper and oil, but measured in terms of consumption rates, they consist of days, weeks or a few months.

Now for one moment I ask you to forget about the stockpiles. Then, the only supply that could come to the market would be recent production. And that would be sold to buyers who want to destroy it. Without stockpiles, supply is exactly production and demand is exactly consumption. Under those conditions, the market price regulates the flow of production into consumption.

Now, let’s add the stockpiles back to the picture. With stockpiles, it is possible for consumption to exceed production, for a short time, by drawing down stock piles. Due to the small size of the stocks, this situation is necessarily temporary because stocks will be depleted, or, before that happens, people will see that the stocks are being drawn down and would start to bid the price back up to bring consumption back in line with production.

Now let’s look at assets. An asset is a good that people buy it in order to hold on to it. The value from an asset comes from holding it, not from destroying it. The simplest asset market is one in which there is a fixed quantity that never changes. But it can still be an asset even when there is some production and some consumption. They key to differentiating between consumption and asset is to look at the stock to production ratio. If stocks are quite large in relation to production, then that shows that most of the supply is held. If stocks are small, then supply is consumed.

Let me give you some examples: corporate shares, land, real property. Gold is primarily an asset. It is true that a small amount of gold is produced and a very small amount of gold is destroyed in industrial uses. But the stock to annual production ratio is in the 50 to 100:1 range. Nearly all the gold in the world that has ever been produced since the beginning of time is held in some form.

Even in the case of jewelry, which people purchase for ornamental reasons, gold is still held. It could come back to the market. Every year people sell jewelry off and it gets melted and turned into a different piece of jewelry or coins or bars, depending on where the demand is. James Turk has also pointed out that a lot of what is called jewelry is an investment because in some parts of the world there’s a cultural preference for people to hold savings in coins or bars but in other areas by custom people prefer to hold their portable wealth as bracelets or necklaces. Investment grade jewelry differs from ornamental jewelry in that it has a very small artistic value-added on top of the bullion value of the item.

So, now that I’ve laid out this background, the price of a good in a consumption market goes where it needs to go in order to bring consumption in line with production. In an asset market, consumption and production do not constrain the price. The bidding process is about who has the greatest economic motivation to hold each unit of the good. The pricing process is primarily an auction over the existing stocks of the asset. Whoever values the asset the most will end up owning it, and those who value it less will own something else instead. And that, in in my view, is the way to understand gold price formation.

Many of the people who follow and write about this market look at it as if it were a consumption market and they look at mine supply and industrial fabrication as the drivers of the price as if it were tin, or coal, or wheat. People who look at gold as if it were a consumption market are looking at it the wrong way. But now you can see where the error comes from. In many financial firms gold is in the commodities department, so a commodities analyst gets assigned to write the gold report. If the same guy wrote the report about tin and copper, he might think that gold is just the same as tin and copper. And he starts by looking at mine supply and industrial off-take.

I wonder if more equity analysts or bond analysts were active in the gold area, if they would be more likely to look at it the same way they look at those assets.